Allahabad H.C : The ITAT is legally justified in cancelling the penalty levied under section 271(1)(c) of the Income-tax Act irrespective of the fact that the assessee claimed excess depreciation to the tune than what was admissible to him as per the provisions of the Income-tax Act

High Court Of Allahabad

CIT vs. Jindal Polyester & Steel Ltd.

Assessment Year 1998-99

Section 271(1)(C), 115J And 115JB

Rajes Kumar And Dinesh Gupta, JJ.

IT Appeal No. 73 Of 2001

April 7, 2014

JUDGMENT

1. Heard Sri Shambhu Chopra learned senior standing counsel of the Income-tax Department and Sri Rupesh Jain appearing on behalf of the respondent.

2. The following questions have been raised in the present appeal.

“(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is legally justified in cancelling the penalty levied under section 271(1)(c) of the Income-tax Act irrespective of the fact that the assessee claimed excess depreciation to the tune of Rs. 1,42,30,221 than what was admissible to him as per the provisions of the Income-tax Act ?

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is legally justified in cancelling the penalty levied under section 271(1)(c) in spite of the fact that the assessee did not furnish any explanation either before the Assessing Officer or before the Commissioner of Income-tax (Appeals) for claiming excess depreciation than admissible under the Income-tax Act and Explanation 1 to section 271(1)(c) clearly states that where in respect of any facts material to the computation of income of any person, such person fails to offer an explanation, the amount added in computing the total income of such person shall for the purpose of section 271(1)(c), be deemed to represent the income in respect of which particulars have been concealed ?”

3. The brief facts of the case are that the respondent is a company involved in the manufacture of steel pipes, synthetic filament yarn and polyester clips, etc., filed its return for the assessment year 1998-99. The return was for 23 months disclosing the total loss at Rs. 1,75,91,003 computed in accordance with the provisions of Income-tax Act and has worked out its taxable liability under section 115J of Rs. 37,42,640.

4. The assessing authority computed the books profit for the purpose of levying tax under section 115J at Rs. 5,58,33,750. The allegation of the assessing authority is that the assessee has claimed extra depreciation under the profit and loss account.

5. The matter went in appeal before the Tribunal. The Tribunal has accepted the book profit disclosed by the assessee for the purpose of levy of tax under section 115J. This is not in dispute.

6. The assessing authority, however, on the basis of the assessment order levied penalty under section 271(1)(c) at Rs. 1 crore which has been reduced to Rs. 74,17,870 by the Commissioner of Income-tax (Appeals) in the appeal against which the assessee filed appeal before the Tribunal which has been allowed by the impugned order dated December 15, 2000. The Tribunal has deleted the penalty. The Tribunal has recorded the following finding :

“We have carefully considered the facts and circumstances of the case. The sum and substance of the matter is that the income returned by the assessee stands accepted as the final taxable income. Therefore, the bona fide of the assessee cannot be doubted. The assessee did not make a mistake in the calculation of income under the normal provisions of the Income-tax Act which was required only for comparison. There was in fact a calculation of bona fide mistake. The income under the normal provisions of the Act had to be ignored because the income under section 115J was always higher. All the facts relating to depreciation are fully disclosed in the notes on accounts accompanying the return. Even the computation of depreciation as per the Income tax Act was filled by the assessee on its own. The calculation under the normal provisions of the Income-tax Act had in any case to be ignored on the facts of the case and the same cannot be the basis for levy of penalty under section 271(1)(c) of the Act as the income was not assessed under the normal provisions of the Act.

Even under the normal provisions of the Act, the income of the assessee has been calculated at nil. The assessee in support of the claim relied on the decision of the Punjab and Haryana High Court in the case of CIT v. Prithipal Singh & Co. [1990] 183 ITR 69 which is affirmed by the Supreme Court in Civil Appeal No. 1961 of 1996, vide order dated June 27, 2000.”

7. Learned counsel for the appellant submitted that the assessee has wrongly claimed excessive depreciation by adopting the provisions under the Income-tax Act. He, however, admitted that the book profit disclosed by the assessee has been accepted by the Tribunal for the purposes of levy of tax under section 115J.

8. He, however, further submitted that whether the depreciation is to be calculated in accordance with the Companies Act or under the Income-tax Act for the purposes of computation of book profit is a subject matter of consideration by the larger Bench of the apex court in the case of Dynamic Orthopaedics (P.) Ltd. v. CIT [2010] 321 ITR 300/190 Taxman 288/1 taxmann.com 85 (SC).

9. Learned counsel for the respondent submitted that the book profit disclosed by the assessee for the purpose of levy of tax under section 115J has been accepted by the Tribunal and against the order of the Tribunal Income-tax Appeal No. 182 of 2000 filed by the Commissioner of Income-tax (Appeals) has been dismissed by this court, vide order dated August 28, 2012 CIT v. Hindustan Pipe Udyog Ltd. [2014] 360 ITR 437/[2013] 31 taxmann.com 351/214 Taxman 9 (Mag.)(All.) thus the order of the Tribunal has become final.

10. He further submitted that for the purposes of levy of penalty the book profit for the purpose of determination of liability under section 115J is relevant and not the income as per the Income-tax Act and since the book profit disclosed by the assessee for the purpose of levy of tax under section 115J has been accepted by the Tribunal has rightly deleted the penalty as there was no concealment. Reliance has been placed on the Division Bench decision of this court in the case of CIT v. Aleo Manali Hydro Power (P.) Ltd. [2013] 38 taxmann.com 288/219 Taxman 90 (Mag.) (All) and submitted that the decision of the this court is based on the decision of the Delhi High Court in the case of CIT v. Nalwa Sons Investments Ltd. [2010] 327 ITR 543/194 Taxman 387 against which special leave petition was dismissed by the apex court.

11. He further submitted that even in the false claim of depreciation penalty cannot be levied. Reliance has been placed on the case of CIT v. Gold Coin Health Food (P.) Ltd. [2008] 304 ITR 308 (SC).

12. We have considered the rival submissions. It is not in dispute that the Tribunal has accepted the book profit disclosed by the assessee in the assessment appeal which has been affirmed by this court in the appeal by its order dated August 28, 2012, in Appeal No. 182 of 2000 (Hindustan Pipe Udyog Ltd. (supra).

13. This court, while dealing with the appeal arising from the assessment proceeding with respect to the determination of liability under section 115J, has observed as follows (page 441 of 360 ITR) :

‘On the third question, regarding change in the method of charging depreciation from the straight line to the written down value method, the question, as rightly pointed out by the learned counsel for the respondent-assessee, is also covered by the decision of the Supreme Court in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 (SC). In Malayala Manorama Co. Ltd. v. CIT [2008] 300 ITR 251 (SC), the Supreme Court following the ratio of the judgment in Apollo Tyres (supra) held as follows (page 259 of 300 ITR) :

‘In Apollo Tyres (supra), this court examined the object of introducing section 115J in the 1961 Act. The court relied on the budget speech (see [1987] 165 ITR (St.) 1, 14) of the then hon’ble Finance Minister of India made in Parliament while introducing the said section. The relevant portion of the speech is reproduced as under :

“It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called zero-tax highly profitable companies deserves attention. In 1983, a new section 80VVA was inserted in the Act so that all profitable companies pay some tax. This does not seem to have helped and is being withdrawn. I now propose to introduce a provision whereby every company will have to pay a minimum corporate tax on the profits declared by it in its own accounts. Under this new provision, a company will pay tax on at least 30 per cent. of its book profit. In other words, a domestic widely held company will pay tax of at least 15 per cent. of its book profit. This measure will yield a revenue gain of approximately Rs. 75 crores.”

The court held that the purpose of introducing this section was that the income-tax authorities were unable to bring certain companies within the net of income tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that section 115J was introduced in the 1961 Act with a deeming provision which makes the company liable to pay tax on at least 30 per cent. of its book profits as shown in its own account. For the said purpose, section 115J makes the income reflected in the companies books of account as the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of the words in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an Assessing Officer under the Income-tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinized and certified by statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, the court observed that it is difficult to accept the argument of the Revenue that it is still open to the Assessing Officer to rescrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. The court categorically held that (page 280 of 255 ITR):

“… the Assessing Officer while computing the income under section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J…”

Mr. Vellapally has also drawn our attention to the division bench judgment of the Bombay High Court in Kinetic Motor Co. Ltd. v. Deputy CIT [2003] 262 ITR 330 (Bom) and submitted that in this case the Bombay High Court relied on the said judgment of Apollo Tyres and held the issue in favour of the assessee. In this case, the Division Bench of the Bombay High Court observed as under (page 333 of 262 ITR) :

“The short question that arises for consideration in this tax appeal is whether it is open to the Assessing Officer to make adjustment to the book profits beyond what is authorised by the definition given in Explanation to section 115J of the Income-tax Act, if the accounts are prepared and certified to be in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. In the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 (SC), the apex court held that while computing the income under section 115J of the Income-tax Act, the Assessing Officer has only power to examine whether the books of account were certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. It is further held that the Assessing Officer thereafter has limited powers of making increases and reductions as provided for in the Explanation to the said section. The apex court further held that the Assessing Officer does not have the jurisdiction to go beyond the net profits shown in the profit and loss account, except to the extent provided in the Explanation to section 115J of the Income-tax Act. In the instant case, the accounts maintained by the assessee are certified by the auditors. Under the circumstances, the book adjustment made by the Assessing Officer being contrary to the decision of the apex court, question No. 1 is answered in the negative and in favour of the assessee.”

In view of our answer to question No. 1, question No. 2 becomes academic. It is not in dispute that under the Companies Act, 1956, both straight line method and written down value method are recognised. Therefore, once the amount of depreciation actually debited to the profit and loss account is certified by the auditors, then, as per the decision of the apex court in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 (SC), question No. 2 has to be answered in the negative and in favour of the assessee.’

This court, while dealing with the penalty under section 271(1)(c), in Aleo Manali Hydro Power (P.) Ltd. (supra) has held as follows (page 527) :

“The Delhi High Court held that in respect of the company in question on the basis of normal provision income was assessed at negative, i.e., on loss of Rs. 36,95,21,018. The company was MAT company and that the assessment under section 115JB resulted in calculation of profit at Rs. 4,01,63,180. The income of the assessee was thus assessed under section 115JB and not under normal provision. It was held ‘no doubt, there was concealment but that had its repercussions only when the assessment was done under the normal procedure. The assessment as per the normal procedure was, however, not acted upon. On the contrary, it is the deemed income assessed under section 115JB which has become the basis of assessment as it was higher of the two. Tax is thus paid on the income assessed under section 115JB. Hence, when the computation was made under section 115JB, the concealment had no role to play and was totally irrelevant. Therefore, the concealment did not lead to tax evasion at all. The upshot of the aforesaid discussion would be to sustain the order of the Tribunal, though on different grounds. Therefore, while the reasoning and approach of the Tribunal is not tenable, for the reasons disclosed above, penalty could not have been imposed even in respect of the false claim of depreciation made by the assessee. CIT v. Gold Coin Health Food (P.) Ltd. [2008] 304 ITR 308 (SC) ; [2008] 218 CTR (SC) 359 ; [2008] 11 DTR (SC) 185 distinguished.”

15. On the facts and circumstances we are of the view that the issue involved is squarely covered by Division Bench Decision of this court in the case of Aleo Manali Hydro Power (P.) Ltd. (supra).

16. The book profit disclosed by the assessee for the purpose of the liability of tax under section 115J is relevant and not the income determined under the provisions of the Income-tax Act.

17. The Tribunal, on the facts and circumstances of the case, has further recorded the finding that, on the facts and in the circumstances of the case and on the bona fide of the explanation given by the assessee and the disclosure made in the accounts accompanying the return, no penalty is leviable.

18. The finding of the Tribunal in this regard is a finding of fact.

19. In view of the aforesaid discussion both questions Nos. 1 and 2 are answered in favour of the assessee in the affirmative.

20. The appeal is accordingly dismissed.

[Citation : 365 ITR 225]